Understanding the basics of contingent offers can help you approach your home search with confidence.
A contingent offer simply refers to the existence of a contingency clause in a purchase agreement that helps define the terms under which that contract will be executed. It means an agreement has been reached, but for the sale to go through certain criteria must be met within an agreed upon timeline.
These clauses are typically put in place to protect the buyer and seller and outline the terms that would allow the offer to be rescinded without the surrender of the deposit (also called earnest money).
Contingencies are simply contract clauses and therefore can take many forms, but three are much more common than others:
An inspection contingency allows the potential buyer to place an offer on a home while retaining the right have a licensed home inspector review the property. The time allowed for the inspection is spelled out in the purchase agreement but generally is within 7-10 days after the offer is accepted.
Following the inspection, small repair items may become a point of negotiation, while larger items could merit the buyer voiding the contract. Almost all single family residential real estate transactions include an inspection contingency. Sometimes a buyer will not include an inspection contingency if they are comfortable with the home condition and want to strengthen their offer.
Appraisal and Financing Contingency
Equally popular as an inspection contingency is an appraisal and financing contingency. This protects the buyer and seller by spelling out the dates and terms that financing must be in place and supported by an appraisal. It ensures that the buyer is approved for a loan and that the property valuation supports that loan in line with the lender’s underwriting requirements. Terms and timing vary, but most financing and appraisal contingencies must be met at least two weeks prior to the agreed upon closing date.
Home Sale Contingency
The third common type of contingency is a home sale contingency which is designed to protect the new home buyer by tying the sale of another property to the transaction. These types of contingencies are more complex and frequently also the least understood. With a home sale contingency, the buyer is interested in purchasing a new home, but only if they can sell their existing property in time.
Terms vary based on a variety of factors, but the following typically apply:
- Seller retains the ability to market their home in an attempt to locate a buyer willing to purchase without a contingency
- If the seller finds a new buyer, the buyer from the original contract has a pre-defined period of time to remove the contingency (typically 24-48 hours)
- If the original buyer fails to meet the terms, the contract terminates
- Alternatively, if the buyer is able to sell their home, the contract is executed
A home sale contingency introduces additional variables to a home sale contract. These have implications for both the prospective buyer and seller.
Considerations for buyer
- Costs- Contingent offers are not free and require similar out-of-pocket expenses to non-contingent offers (appraisal, inspection, bank fees, etc)
- Emotions- Along with financial concerns come emotional burdens as you proceed in a process without clarity of outcomes
- Leverage- Your negotiating power for a contingent offer will be reduced because your offer is less attractive. This can lead to less favorable terms in price and others
Considerations for seller
- Marketing- A home under contract is harder to market as buyers and agents may prefer the clarity that comes with a clearer path to a purchase
- Timing- With no guarantees that your buyer will sell their existing home, you could miss out on other opportunities or even an entire buying season
- Third Wheel- A contingent sale means you are bound by the buyer’s situation without the control to impact decision-making
- Situational Clarity- To proceed you must understand your buyer’s situation well (is the home priced correctly, what is the average time on market for similar homes etc)
Home sale contingencies can be tricky, but may be worth it in the long run in order to avoid paying two mortgages (buyer) or to obtain favorable terms on a sale (seller). Every situation is different and a clear picture of all the pertinent facts can inform your approach.
At Zachary Adams and Associates we have extensive experience with contingencies, their benefits and drawbacks. We have facilitated 100s of transactions in the west metro of Minneapolis and would love to earn your trust and add you to our list of satisfied clients. For a fast and free consultation, contact us today at 612.656.9647 or find us online at westmetrohomesearch.com.